Kristen Peed, CBIZ director of corporate risk management, and Sandy Bigglestone, Vermont deputy commissioner of captive insurance, on why the process of establishing a captive is not straightforward. They also explain how it can be smoother if you learn from others and know what to expect in general

Though captives provide a flexible and efficient insurance solution, there are preconceptions about how they are established, with some owners underestimating the time and preparation involved. Showcasing this journey at CICA, using the analogy of a boardgame ‘Captiveland’, CBIZ director of corporate risk management Kristen Peed and Vermont deputy commissioner of captive insurance Sandy Bigglestone explain how the former’s journey of establishing a captive in the Green Mountain State is progressing.

Captive Review (CR): What session will you both be doing at the CICA conference and why did you choose that topic?

Kristen Peed (KP): Sandy and I were talking about my journey with getting a captive set up at CBIZ and our upcoming session, and she used the notion of ‘Sandyland’ to describe how setting up a captive is like going through a board game, with ups and downs and lessons learned. I pointed out this was actually a ‘Captiveland’. Then it clicked: how about we turn this session into more of a board game kind of concept? This would help us talk about the process of setting up a captive for those who are just getting started, using the simple imagery of the Candyland game.

Sandy Bigglestone (SB): We talked about the lessons you learn from the process of forming a new captive – using the analogy of a board game like chutes and ladders, there are ups and downs, and there may be setbacks to overcome, but certainly lessons to learn along the way. That really helped us settle on using a board game to set the tone of the session, and have some fun while learning. I have to give Kristen all the credit for really diving into it and putting together some great slides. It will be a refreshing way of approaching a ‘basics of captives’ session, but from the starting point where someone has already decided on setting up a captive.

CR: Kristen – can you tell us about why your company is considering forming a captive? And why are you considering Vermont as your domicile of choice?

KP: For me, insurance is primarily a relationship-driven business. I had the fortune of meeting Sandy at a conference several years ago. At that point, I already had some experience – at my previous company – of the benefits of a captive. Sandy then told me more about Vermont and I liked what I heard – I was struck by the quality of service providers in Vermont. For me, it really boils down to relationships and ease of doing business. The regulators in Vermont are also very active and easy to talk to. In our feasibility study, we had our captive manager look at a variety of options, but it was no surprise to me Vermont was the number one recommendation. At CBIZ, we are forming a captive because we are growing fast and the hard market over the past few years has pushed up premiums despite our claims not going up. We are a really well-run company with little claim experience. I was talking to our executives and explaining how much of our underwriting profit we were giving away and started pointing out how a captive could really set us up in the long term as a part of our risk management strategy.

SB: I remember meeting Kristen at the conference, she was so enthusiastic about setting up a captive. It was a story we have heard so many times, whereby a risk manager moves to a different company and wants to establish a captive. We realised this might be a common journey and an exciting opportunity for a risk manager. I’m really glad to be back in touch with Kristen and doing this session now for the benefit of others.

CR: What are some lessons learned in the process?

KP: When I first joined CBIZ, I was very gung-ho and made a presentation about the captive without really understanding it and its benefits, and I fell flat on my face! I recognise now I did not understand the problems I could help solve by implementing a captive, ie what were the issues we were having in HR, accounting, with regard to claims management and so on? I would say you have to slow down before you can get started. Do your homework internally before going externally to the captive managers. Understand what you are trying to solve and improve, and ensure you can answer those questions. Once I had that nailed, I then went about building a base of support with all the departments I would need buy-in from and did captive 101s with the department heads to educate them. Once I had buy-in, this all started to fall into place. People should know it will likely take a lot longer than they think. It’s taken us a full 18 months from start to end. At the moment, I am reviewing the application, chasing down one last board affidavit, and getting our attorney to file all the paperwork. As we’ve moved the start date a few times, we had to redo the actuarial data so we are waiting for those. Then it’ll be about working with our captive manager to ensure all the boxes are ticked.

CR: Sandy – what sorts of things are you looking for to determine if a company is a good fit for Vermont?

SB: Fundamentally, we look for a company coming to us with a need for an insurance solution. How are they articulating their need? Do they want greater control, for instance? Captives can form for all sorts of reasons and new benefits can emerge over time – ie accessing the reinsurance market, taking on other forms of risk, etc. When a company can articulate these reasons, we know they’re a good fit for Vermont. Of course, we also look to see that what they are proposing fits our standards as well as Vermont’s law. We like when a company lets us know ahead of time, before an application is filed. A pre-application meeting holds a great deal of value, for the regulator to understand what a company seeks to propose, and for the company to get to know the regulator. As Kristen said, this can be an extensive process so early communication helps the applicant know what to expect in the process of forming a captive and what life as a captive will essentially be like in Vermont.

CR: Since your session metaphorically compares forming a captive to playing the game of Candyland, what do you mean by “getting your gingerbread house ready”?

SB: From my perspective as a regulator, if you think about the structure of a house there is a foundation that is crucial to build and provide for future stability. Getting your house in order is particularly important at the formation stage. Who are the players? What types of service providers and partners are being utilised to bring the structure to fruition? Beyond that, a company will need to gather all the necessary information needed to demonstrate the captive is feasible and viable. This means necessary information to support chosen coverage, capital levels, and the captive’s overall plan of operation. The company and the regulator should ask the question, what could go wrong and what’s the response if something does go wrong? In addition, Vermont takes a holistic view across the entire ‘gingerbread house’ and how it is built.

KP: At my previous company, the captive I was working with had been set up in the 1970s and was well established. That meant my captive knowledge was limited so I had to learn a lot about how they work and can be set up in different ways. In your organisation, it’s vital to do your homework and build your credibility so you can become the architect of the project.